NOTES PAYABLE AND DERIVATIVE LIABILITY

3 Months Ended

Mar. 31, 2025

Notes Payable And Derivative Liability

NOTES PAYABLE AND DERIVATIVE LIABILITY

6. NOTES PAYABLE AND DERIVATIVE LIABILITY

Background

On October 14, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) for the purchase of senior secured convertible notes (the “Note”) with an institutional investor (the “Holder”). The principal amount for the initial note is $45.0 million (the “Initial Principal Amount”), with an option for the Company to issue additional principal in the amount of $30.0 million (the “Additional Principal Amount” and, together with the Initial Principal Amount, the “Principal Amount”) of convertible notes to the Holder, subject to certain limitations. On October 23, 2024, the Purchase Agreement closed and the Note was issued for net proceeds of approximately $38.1 million, inclusive of all discounts, fees, and expenses related to the transaction.

On December 30, 2024, pursuant to the terms of the Note, the Holder elected to convert $1.8 million of outstanding principal into 2,345,068 shares of the Company’s common stock.

On February 3, 2025, the Company entered into a Letter Agreement with the Holder related to the Note. As a result of the Letter Agreement, the Holder elected to early convert $8.8 million of outstanding principal into 11,725,337 shares of the Company’s common stock. Additionally, as a result of the Letter Agreement, the Holder agreed to defer $11.6 million of principal repayments to seven monthly payments of $1.7 million beginning on September 1, 2025 and concluding on March 1, 2026. The Letter Agreement represents a modification requiring extinguishment accounting in accordance with ASC 470. As a result of the modification, a realized loss on debt modification of $4.7 million and interest expense of $2.1 million were recorded on the condensed consolidated statement of operations.

Components

The Note is a convertible debt instrument with multiple redemption, conversion, and put features. Certain features qualify as embedded derivatives requiring bifurcation. Therefore, the bifurcated features are accounted for separately as a compound embedded derivative in accordance with ASC 815, “Derivatives and Hedging” and are included in the derivative liability on the condensed consolidated balance sheets. The host contract, which represents the Note excluding the derivative liability, is accounted for as non-convertible debt under ASC 470, “Debt” and is included in notes payable, current and notes payable, net of current portion on the condensed consolidated balance sheets.

Notes Payable

Subsequent to the modification, the host contract is recorded at the total amount repayable at maturity of $36.0 million, less any unamortized debt discount. The debt discount is equal to the amount repayable at maturity, net of the initial fair value of the bifurcated derivative liability. There were no material qualifying debt issuance costs resulting from the modification.

Supplemental balance sheet information is as follows:

	March 31,			December 31,
(in thousands)	2025			2024
Amount repayable at maturity	$	36,025		$	47,575
Unamortized debt discount		(5,918	)		(12,021	)
Unamortized issuance costs		-			(2,552	)
Net carrying amount		30,107			33,002

Interest expense related to the amortization of the debt discount and issuance costs was $3.5 million and $0.0 million for the three months ended March 31, 2025 and 2024, respectively. Total interest expense of $12.9 million for the three months ended March 31, 2025 is comprised of the following components:

	March 31,
(in thousands)	2025
Amortization of debt discount and issuance costs	$	3,502
Interest expense from modification of notes payable		2,057
Discount on warrants (see Note 7. Warrant Liability)		7,325
Other		19
Total interest expense	$	12,903

The monthly effective interest rate implicit in the Note as of March 31, 2025 under the interest method was 2.34%.

Maturities of partial repayments, if elected by the Holder, are as follows:

(in thousands) Years Ended December 31,	Maturities
2025 (remainder)	$	22,000
2026		14,025
Total partial repayments	$	36,025

Derivative Liability

As a result of the modification, one embedded feature previously accounted for within the derivative liability no longer required bifurcation and was recombined with the host contract at a fair value of $0.2 million. Subsequent to the modification, the derivative liability was initially recorded at its fair value of $7.2 million as of the modification date of February 3, 2025. The derivative liability is subsequently remeasured and reported at fair value each reporting period, with the changes in fair value recorded as an unrealized gain or loss and recognized in earnings.

The fair value of derivatives not designated as hedging instruments are as follows:

	March 31,		December 31,
(in thousands)	2025		2024
Derivative liability	$	4,867	$	14,581
Total	$	4,867	$	14,581

Unrealized gains and losses associated with derivatives not designated as hedging instruments are as follows:

	March 31,		March 31,
(in thousands)	2025		2024
Unrealized gain on derivative liability	$	842	$	-
Total	$	842	$	-

Fair Value Measurements

The fair value of the derivative liability is determined utilizing a “with and without” method, in which the fair value is calculated as the difference in the fair value of the entire hybrid instrument and the fair value of the instrument excluding the bifurcated derivative features.

The valuation inputs hierarchy classification for liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2025 and December 31, 2024 (in thousands). See Note 5. Investment Securities, Available-For-Sale and Fair Value Measurements, for discussion of the fair value level hierarchy.

As of March 31, 2025	Level 1		Level 2		Level 3
Derivative liability	$	-	$	-	$	4,867
Total	$	-	$	-	$	4,867

As of December 31, 2024	Level 1		Level 2		Level 3
Derivative liability	$	-	$	-	$	14,581
Total	$	-	$	-	$	14,581

The table below lists the inputs and assumptions for the Company’s valuations as of March 31, 2025 and December 31, 2024:

	March 31,			December 31,
	2025			2024
Expected term (years)		1.5			1.75
Risk-free interest rate		3.92	%		4.18	%
Dividend yield		0	%		0	%
Volatility		82.36	%		78.02	%
Discount rate		50.0	%		50.0	%